Patience may be a virtue, according to the old saying, but for many in the trading community, it is more like a vice. Traders are preoccupied with speed, an obsession illustrated by the statistical arbitrage and algorithmic strategies that they now employ. Such advanced trading methods have forced Europeâs stock markets to invest heavily in technology in recent years, ramping up capacity and slashing latency to cope with a surge in the velocity of trading.

Bourne: algorithms are prevalent

The London Stock Exchange has been the most successful of the three biggest European markets at raising its share turnover velocity, according to data collated by the World Federation of Exchanges, a trade body. Share turnover, a measure of stock liquidity, is calculated by dividing the total number of domestic shares traded in the course of a year by the average number of shares outstanding.

Share turnover in London rose 84% between 2001 and 2007, trumping a 76% rise in Frankfurt and a 1% fall on Euronext’s markets, according to the WFE.

A spokeswoman for the LSE said: “Our share turnover has increased because traders are increasingly using algorithmic strategies that take advantage of our faster systems and greater capacity post TradElect.

“Also, we have increased the range of stocks traded electronically, and the tighter spreads that have resulted have made trading more attractive – and that has also boosted liquidity.”

Kevin Bourne, global head of eEquities at HSBC, said: “The increase in share turnover can be partly attributed to the prevalence of algorithmic trading. There is an increasing array of algorithms of various shapes, colours and sizes that aim to reduce the market impact of trades by performing to pre-determined criteria.”

The growing number of hedge funds that use sophisticated statistical arbitrage strategies to capitalise on tiny differences in markets has driven up trading volumes. Such players help tighten spreads, which makes trading more attractive, according to one broker, who declined to be named.

Another factor that has contributed to the surge in share turnover is the increased take-up of direct market access, where a broker enables a fund manager to trade directly on the market. Bourne said: “Vanilla DMA has made it easier for fund managers to send trades to the exchange.”

Seven years ago, Euronext had the highest share turnover velocity of Europe’s three biggest markets, with 138% of its listed capitalisation traded annually, against 118% in Frankfurt and only 84% in London, according to the WFE. Today, Euronext’s share turnover is the lowest of the three.
Euronext disputes the WFE’s figures. A spokeswoman said that exchanges submit their own data to the Federation, and that differences in reporting and calculation methods make figures difficult to compare.

She said: “The LSE’s share turnover spiked at the end of last year when they decided to include all over-the-counter activity in their transaction value, which was not the case before. This doesn’t conform, strictly speaking, to the criteria stipulated by the WFE. If you strip out OTC activity, Euronext and LSE follow the same trend.” The LSE declined to comment on Euronext’s claim.

Meanwhile, Deutsche Börse has the highest share turnover of the exchange trio. Stock worth 208% of the market capitalisation of the exchange’s listed companies was traded last year, against 154% for the LSE and 137% for Euronext.

A spokesman for Deutsche Börse said: “A high share turnover velocity is an indicator of market depth. A more liquid market leads to lower bid-ask spreads and consequently lower implicit transaction costs. These factors lead to a high turnover velocity – a high ratio in domestic share trading, a high ratio in blue-chip trading, cost-efficient trading and the best technology.

“Another factor is certainly a high percentage of algotrading. These factors boost trading volume. A high ratio is also an indicator of the participation of all categories of investors and traders – private, institutional, long-term, short-term and algo traders.”

The German market claimed last month that total transaction costs on Chi-X, the European equities platform, were 83% higher than those on its electronic platform Xetra because trades were less likely to be executed at the best price.

Rob Boardman, head of algorithmic sales in Europe for ITG, said: “Deutsche Börse has good schemes in place for algorithmic traders, such as its Automated Trading Program system.”

The structure of the German market may also contribute to its high share turnover. Boardman said: “Deutsche Börse operates a vertical silo business model, whereby trades must be cleared through the exchange’s clearing house, Eurex. This structure may increase velocity, but it also reduces competition.”

A spokeswoman for Euronext said the figure for Deutsche Börse was flattered by a lack of small-cap stocks, which tend to be traded more infrequently.